Wednesday, October 31, 2007

U.S. Concrete [ RMIX ], a hedge

Ouch! When I left yesterday for the golf course, MLM was down $3. When I returned it had completed a $10 swing and finished up the day plus $6+! To make matters worse, I lost $7 on the course.

Happily my puts are still profitable, just less so. I listened to both the VMC and MLM conference calls and still think that residential development won’t recover as fast as they believe and was encouraged that MLM saw a “slowing of commercial construction growth.” Zelnack termed that area as a”big uncertainty.” Vulcan still hadn’t seen any negatives in the non-residential area. I think it’s happening now and it will be noticeable in the current quarter.

So, I’m going to ride this horse a little longer. But, I’m going to hedge my bet somewhat.

I’ve been buying some U.S. Concrete [ RMIX ] as a hedge. If MLM runs upward, hopefully US will also and that profit will help offset the drop in value on the MLM puts.

US is a smaller redi-mix concrete company that has additional operations in aggregates, concrete block, and precast concrete pipe. Their big markets are the Bay Area in California, Dallas, Memphis, Detroit, and New Jersey. They have been growing by acquisition and their efforts have been on integrating and acquiring, not wringing out profits. That should come in time.

In the last three or four months the stock has moved down from $9.50 to $5. It sells at a forward P/E of 10X and a PEG ratio of 1.23X. You’re buying it at a Price to sales ratio of .23 and a very conservative price to book ratio of .72. Enterprise value to EBITDA is 6X. They need to start making some more money and generating more cashflow to make me a long term owner, but it suffices as a hedging devise and if they do start improving their earnings they can stay in my portfolio as I like the industry and will buy both VMC and MLM later.

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